IGC underlines huge China grain stocks, as it ups world harvest hopes

The International Grains Council underlined the huge extent of China's grain stocks, which have spurred the country to shake-up its subsidies, as the group upgraded again its estimate of this year's record harvest.

The intergovernmental group - while raising by 7m tonnes to 498m tonnes its forecast for world grain inventories at the close of 2016-17, growth of 23m tonnes year on year – flagged that some 40% of these supplies would be stockpiled in China.

"Grains inventories… in China could reach 200m tonnes," a total which, while not unprecedented, has not been seen since the 1990s.

The forecast comes amid a continued market focus on China's grain inventories, and the implications of the measures that the country is undertaking to reduce its stockpiles which, besides swallowing up large amounts of capital, are believed in many cases to be stored in poor conditions, encouraging crop deterioration.

'Tipping point'

Last week, China's cabinet restated goals announced earlier this year to cut corn sowings by 0.7% a year over the next five years, with area expected to fall to 33.3m hectares by 2020.

Area is intended to be switched largely instead to soybeans, of which China is a huge importer, and for which area will rise to some 9.3m hectares in 2020, from 6.5m hectares last year.

Overnight, US broker CHS Hedging said that "this year could be the tipping point for that change.

"Since 2003, corn harvest area has increased every single year until 2016," for which area is pegged at 36.0m hectares, down 2.12m hectares year on year.

The shift is being achieved through a switch away from guaranteed prices, which have favoured corn sowings, to direct farmer support.

The government is also undertaking auctions from inventories swollen by huge sales by farmers at guaranteed prices often fixed at levels well above international market values.

Trade impact

The IGC added that China's focus on tackling its huge stockpiles would dent grain trade in 2016-17, as Beijing's moves encourage domestic consumers to turn to the country's own supplies, rather than to imports.

A forecast of world grain trade falling by 7m tonnes year on year, to 337m tonnes, despite the increased production, "is mainly linked to measures in China to encourage the use of local alternatives in place of imported feed grains, including barley and sorghum," the IGC said.

Still, world trade in wheat, of which China typically requires some imports of higher quality supplies, will reach a record high of 167m tonnes, 3m tonnes more than previously expected.

"Higher-than-normal purchases by India could help to boost wheat trade to a new high," the council said.

Quality factor

John Phelan, chief economist at Agrimoney.com, added that there was potential for the Chinese government's switch from being a buyer of grains, to being a sell, to "put downward pressure on prices.

"But the magnitude of that effect depends to a large extent on appetite for Chinese grain stocks," he said, adding that "knowledge about their quality is sparse.

"Judging by the disappointing results of auctions so far, where buyers can be reasonably well informed about quality, it is possible that the government will struggle to find buyers at decent prices."

Agrimoney's China 2017 report, written by Mr Phelan, will be published next month.

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